(ESTEEM LOGO)

(ESTEEM LOGO)

(ESTEEM LOGO)

(ESTEEM LOGO)

Electronic Systems Technology, Inc. ("EST" or the "Company") specializes in the manufacturing and development of wireless modem products. The Company uses its research and development, manufacturing, and marketing efforts to produce and market the Company's line of ESTeem (TM) Wireless Modem products and accessories. The Company offers product lines, which provide innovative communication solutions for applications not served by existing conventional communication systems. The Company's products are offered in markets for process automation in commercial, industrial, and government arenas both domestically and internationally, and domestic markets for public safety communications infrastructure. The Company's product lines are marketed through direct sales, sales representatives, Original Equipment Manufacturers (OEM's) and domestic and foreign resellers.

The Company was incorporated in the State of Washington in February 1984, and was granted a U.S. Patent for the "Wireless Computer Modem" in May 1987, and Canadian patent in October 1988. In the past three years, the Company continues to improve its products to incorporate the latest technology and respond to customer needs and market opportunities. During 1999, the Company's development efforts concentrated on refining the new ESTeem 192S product line of spread spectrum, non-licensed radio frequency modems and bringing the product to market. The Company has continually expanded its customer base, particularly in the industrial control arena with efforts to team with all major programmable logic controller (PLC) hardware vendors. The Company has also been involved from time to time as a hardware provider for Government programs such as the Core Automated Maintenance System (CAMS) for the U.S. Air Force and Automatic Identification Technology (AIT) for the U.S. Army. In 1999, the Company expanded marketing ESTeem products for use in mobile data terminal applications by public safety entities, a marketing strategy began in 1998, and continued to participate in foreign and domestic Supervisory Control and Data Acquisition (SCADA), Industrial Automation, and Government marketplaces.

EST's products provide communication links between computers, peripherals, and instrumentation controls using radio frequency waves. The Company's products are packet burst, VHF & UHF FM radio modems, operating in radio frequency bands of 72 to 76 Megahertz (MHz), 150 to 174 MHz, 400 to 420 MHz, 450 to 470 MHz, and 2.4 Gigahertz (GHz).

The ongoing proliferation of computer applications in business, industry and public service has created a dynamic environment of automation and networking which requires increasing amounts of data transfer. Prior to the invention of the ESTeem modem, the majority of data transfers used telephone modems or direct cable connections. These latter methods both have costly side effects. Telephone modems have a potentially expensive monthly charge for the use of telephone lines, and direct cable connections can have installation costs as much or more than the cost of the communication system. ESTeem wireless modem products provide a "Wireless Solution" by eliminating the need for conventional hardwiring and leased phone lines.

All of the ESTeem models ("ESTeems") come with industry standard asynchronous communications ports, giving users new dimensions to "Local Area Networking". As many as 253 devices can be interfaced on a single frequency. ESTeem wireless modems have over one hundred internal software commands, which are saved in non-volatile memory, allowing users to easily configure the unit for any application.

ESTeem Modems work on a packet burst communications concept. Packet systems, whether hardwired or radio, share the same principle of operation: data is taken from a standard RS-232C, RS-422 or RS-485 asynchronous port and is transmitted in "Electronic Packets". The size of the packet can be user defined from 1 to 2000 bytes of information, depending on model. Once a packet of data is formed, it is transmitted in a "burst," from one ESTeem modem to another ESTeem modem, hence the term "packet burst communications." ESTeem Modems provide data accuracy of greater than one part in 100 million. Internal Digi-Repeater features allow the user to increase operating range by relaying transmission through a maximum of three ESTeems to reach a destination ESTeem. An ESTeem can operate as an operating node, a repeater node, or both simultaneously, for added flexibility. Secure data communication is provided in the ESTeem products through use of proprietary technology and techniques, providing users of the products four definable security codes. If higher security is required, the ESTeem is compatible with asynchronous Data Encryption Standard (DES) encryption devices.

Some of the major applications and/or industries for which the ESTeem products are being utilized are as follows:

Domestic: Industrial Automation, inventory control, public safety.

International: Telephone by-pass, industrial automation and inventory control.

The Company sells various accessories that support its EST product lines. Accessories are purchased from other manufacturers and resold by EST to support the application of ESTeem modems. Antennas, power supplies and cable assemblies are examples of such items. The Company also provides Factory Services, such as repair and upgrade of ESTeem products. To assist in the application of ESTeem wireless modems the Company provides professional services, site survey testing, system start-up, and custom engineering services.

For operation in the United States, the ESTeem Radio Modems, require Federal Communications Commission (FCC) Type Acceptance. For operation in Canada, the ESTeem RF Modems require Industry Canada Type Acceptance. Of the Company's current production line, the ESTeem Models 192F, 192C, 192M, 192V, and 192S have applied for and have been granted type acceptance in the United States and Canada.

All ESTeem radio modem products, with the exception of the ESTeem 192S, nonlicensed, spread spectrum wireless modem, require consumer licensing under Part 90 of the FCC Rules and Regulations, which is applied for by the end user of the Company's products. The Company provides information to its customers to assist in the application for FCC consumer licenses.

The Company's products compete in the rapidly changing technology environment of the communications industry, where standards and technologies are subject to rapid and unexpected changes. This environment results in it being necessary for the Company to be continually updating and enhancing existing products, as well as developing new products in order to remain competitive. Research and Development expenditures for new product development and improvements of existing products by the Company for 1999 and 1998 were $171,658 and $139,675, respectively.

During 1999, the Company completed development and brought to market the ESTeem 192S, using spread spectrum, nonlicensed radio architecture to augment the Company's existing products. The Company's development efforts were also used to complete redesign of the outer case structure of the ESTeem products for both cost savings and performance enhancement, to fully be implemented during 2000. Initial research and development was commenced on a wireless modem using Ethernet interface protocol, intended for completion during 2000, to take advantage of perceived market opportunities for this type of product. The Company plans on continued research and development expenditures and to undertake new development and improvement projects, as they become necessary.

The majority of the Company's products are sold and distributed directly from the Company's facility through direct sales to end users of the ESTeem products. The remainder of the Company's sales are through non- exclusive, non-stocking Resellers. Normally, seventy percent of the Company's products are distributed through direct sales and thirty percent are through Resellers. Customers generally place orders on an "as needed basis". As of December 31, 1999, the Company had a backlog of $87,000.

During 1999, the Company continued to advertise in trade publications specifically targeted at users of control, instrumentation, and automation systems worldwide, and public safety entities domestically. The Company's advertising is primarily targeted toward potential customers using Programmable Logic Controllers (PLCs). There are approximately twenty-five major PLC manufacturers worldwide. The Company also attends tradeshows each year specifically targeted toward the customers and markets in which it sells products. During 2000, the Company intends to continue marketing strategies targeted at existing markets of industrial controls and Mobile Data Computers for public safety networks. The Company maintains an Internet web site to provide easy access to product and technical information for both present and potential customers of the Company's products. The Company provides technical support and service for its products through phone support, field technicians, and Internet sources. The Company believes high quality customer and technical support is necessary and vital to its business and the markets in which it competes. To maintain this high level of customer support the Company has in the past, and will continue in the future, to make investments and expenditures in support of its customer service programs.

The Company is continuing marketing activities directed towards all branches of the U.S. Government, including United States Armed Services. Examples of projects the Company's products are included in are; flight-line maintenance for the United States Air Force, flight-line lighting for the United States Navy, command and inventory control for the United States Marine Corps, and the Automatic Identification Technology program for the United States Army. Sales to the U.S. Government are administered primarily through the Company's General Services Administration (GSA) contract. This contract is a fixed price, indefinite quantity and delivery agreement.

Competition for the Company is variable according to the market of the communications industry in which its products are established or are entering. Due to the broad number of applications in which the Company's products perform, there are a resulting broad number of competitors in the electronics and communications industry. All of the markets in which the Company's products are sold are highly competitive. Management believes the ESTeem products compete favorably in these markets because of performance, price, and adaptable to a wide range of applications. The Company's major limitation in competing with other manufacturers is a limited marketing budget.

There is no established market for trading the Common Stock of the Company. The Common Stock is not regularly quoted in the automated quotation system of a registered securities system or association. The Common Stock of the Company is traded on the "over-the-counter" market and is listed on the electronic bulletin board under the symbol of "ELST". The following table illustrates the average high/low price of the Common Stock for the last two (2) fiscal years. The "over-the-counter" quotations do not reflect inter-dealer prices, retail mark-ups, commissions or actual transactions.

The above data was compiled from information obtained from the National Quotation Bureau, Inc. daily quotation service.

The approximate number of record holders of common stock of the Registrant as of February 1, 2000 was 580 persons/entities.

RESULTS OF OPERATIONS

GENERAL: The Company specializes in the manufacturing and development of wireless modem products. The Company offers a product line which provide innovative communication solutions for applications not served by existing conventional communication systems. The Company offers product lines in markets for process automation in commercial, industrial and government arenas domestically, as well as internationally, and domestically to public safety entities for mobile data computer terminal applications. The Company markets its products through direct sales, sales representatives, and domestic, as well as foreign, resellers. Operations of the Company are sustained solely from revenues received through sales of its products and services.

FISCAL YEAR 1999 vs. FISCAL YEAR 1998

GROSS REVENUES: Total revenues for the fiscal year 1999 were $1,434,393 reflecting an 11% decrease from $1,631,298 gross revenues for fiscal year 1998. The decrease is attributable primarily to decreased product sales in 1999, of $1,239,390 as compared to 1998 sales of $1,485,381, reflecting a decrease of 17%. The product sales decrease during 1999 is primarily the result of decreased sales to U.S. Government, and foreign market segments. The Company also reduced the selling price of the ESTeem modem products to both distributors and end users during 1999, but Management believes the overall effect of this price reduction on sales revenues during 1999 was minimal, and that the majority of the decreased sales revenues was due to decreased U.S. Government sales.  Management believes the decrease in U.S. Government sales revenue was the result of lack of U.S. Government funding for, or discontinuance of, programs using the Company's products. As the Company has stated previously, the uncertain nature of U.S. Government purchasing, makes prediction and planning of revenues to be received from the U.S. Government difficult to predict, and there can be no guarantee that sales to the U.S. Government will return to previous levels.

In 1999, a majority of the Company's domestic sales were for industrial automation applications. An example of an industrial automation application is a city's water treatment operation. It is Management's opinion that these industrial automation applications will continue to provide the largest portion of the Company's revenues in the foreseeable future. The Company's domestic sales were also augmented by sales of the Company's products for mobile data computer systems to public entities, which accounted for 40% of the Company's domestic sales during 1999. An example of a mobile data computer system for a public entity is a local area network (LAN), between a police department computer dispatch center and the police departments individual police vehicles.

During 1999, the Company had $133,025 in foreign export sales, amounting to 10% of gross product and service sales for the year. For year-end 1998, foreign export sales were $214,396, or 14% of gross product sales for the year. It is Management's belief that foreign sales decreased due to the result of increased competition in foreign industrial automation markets. Products purchased by foreign customers were used primarily for use in industrial automation projects. Management believes the majority of foreign export sales are due to EST distributor efforts and the Company's Internet website presence. The geographic compositions of the Company's foreign export sales for 1999 and 1998 are shown in Note 6 to the Financial Statements. (See Note 6 to Financial Statements.)

In 1999 products purchased by U.S. Government agencies or by U.S. Government contractors amounted to $46,739 or 3%, of gross product sales compared with 1998 levels of $423,923, or 27%, of gross product sales. During 1999, Products purchased by the U.S. Government were utilized primarily in PC to PC (Personal Computer) networking. Management believes the decrease in U.S. Government sales revenues was the result of lack of U.S. Government funding for, or discontinuance of, programs using the Company's products. The uncertain nature of U.S. Government purchasing, makes prediction and planning of revenues to be received from U.S. Government difficult to predict.

As of December 31, 1999, the Company had a backlog of $87,000. The Company's customers generally place orders on an "as needed basis". Shipment for most of the Company's products is generally made within 5 to 10 working days after receipt of customer orders.

COST OF SALES: Cost of Sales, as a percentage of gross sales, for the years of 1999 and 1998 was 51% and 47%, respectively. The cost of sales variation for 1999 is the result of the Company reducing sales prices of the ESTeem products during 1999, and the product mix of items sold during 1999 having a higher cost than 1998.

INVENTORY: The Company's year- end inventory values for 1999 and 1998 were as follows:

The Company's objective is to maintain inventory levels as low as possible to provide maximum cash liquidity, while at the same time, meet production and delivery requirements. If the Company's sales are less than anticipated, inventory over-stocking can occur. Some parts are maintained at high levels to assure availability to meet production requirements, and accordingly, account for a significant portion of the inventory dollar amount. Based on past experience with component availability, current distributor relationships, and current inventory levels, the Company does not foresee shortages of materials used in production, and the Company has been able to procure parts on a timely basis as of the date of this report. However this cannot be guaranteed in the future and if shortages were to occur material interruption of production and consequently product delivery to customers could occur.

For year-end 1999, purchases and costs allocated to cost of goods sold were $605,240 as compared to $758,870 in 1998. The decrease in purchases and allocated costs is a result of decreased purchases by the Company during 1999 due to lower than expected sales volume during most of the year. Also when compared with 1998, more of the Company's salaries and wages expense that was previously classified as manufacturing support, were in 1999 allocated to research and development projects and engineering projects ultimately billed to customers.

OPERATING EXPENSES: Operating expenses, prior to allocation of expenses to Cost of Sales and Engineering Services, increased to $907,953 in 1999, from 1998 levels of $885,416. Material changes in expenses are comprised of the following components: Advertising expenses decreased to $10,970 in 1999 from 1998 levels of $37,149 due to continued reduced advertising frequency by the Company during 1999. Supplies and materials expenses increased during 1999 to $21,875 in 1999, from $15,568 in 1998 due to increases in research and development projects requiring such material. Professional services increased to $69,785 from 1998 levels of $66,210 due to increased subcontracted engineering services and year-end audit fees. Printing expenses increased to $15,220 during 1999 from 1998 levels of $7,082 primarily due to the redesign of the Company's brochure items and increased marketing mailings by the Company. Repair and maintenance expenses decreased in 1999 to $12,826 as compared to $18,259 in 1998, due to decreased equipment repairs.

Salaries increased to $503,156 in 1999, from 1998 levels of $467,118, due to increased wages paid to engineering services employees, wages paid on a commission basis based on engineering service revenues during 1999, and planned wage increases for Company employees. Travel expenses for the Company increased to $56,292 during 1999 from 1998 levels of $50,847 due to increased travel expenses related to engineering services and increased marketing trips by the Company. The Company incurred bad debt expense of $1,155 during 1999 and did not incur any such expense during 1998.

FISCAL YEAR 1998 vs. FISCAL YEAR 1997

Total revenues for the fiscal year 1998 were $1,631,298 reflecting a 10% increase from the $1,476,487 gross revenues for fiscal year 1997. The increase is attributable to increased product sales in 1998, of $1,485,381 as compared to 1997 sales of $1,337,303, representing an increase of 11%. During 1998 the Company had increased sales to U.S. Government contractors, which accounted for the majority of increased sales revenues. Management believed the increase in U.S. Government sales revenues was the result of unexpected contract purchases, and due to the uncertain nature of U.S. Government purchasing patterns, that a continuation of U.S. Government sales revenues like those experienced in 1998 could not be guaranteed.

In 1998, the Company had $214,396 in foreign export sales, amounting to 14% of gross product and service sales for the year. For year-end 1997, foreign export sales were $340,423, or 24% of gross product sales for the year. It is Management's belief that foreign sales decreased due to the result of economic downturns experienced in Asia and South America, and 1998 performance being compared with the strong 1997 foreign export year of $340,423, or 24% of product sales for the Company, which historically amounts to 15% to 20% of the Company's product sales. Products purchased by foreign customers were used primarily for use in industrial automation projects. The geographic compositions of the Company's foreign export sales for 1998 are shown in Note 6 to the Financial Statements. (See Note 6 to Financial Statements.)

During 1998 products purchased by U.S. Government agencies or by U.S. Government contractors amounted to $423,923 or 27%, of gross product sales compared with 1997 levels of $250,840, or 18%, of gross product sales. Management believed the increase in U.S. Government sales revenues during 1998 was the result unexpected contract purchases, and due to the uncertain nature of U.S. Government purchasing patterns, that a continuation of U.S. Government sales revenues like those experienced in 1998 could not be guaranteed. Management does not base liquidity, profitability, or material purchase projections on anticipated U.S Government sales. Products purchased by the U.S. Government during 1998 were utilized in inventory control, PC/PC (Personal Computer) networking and command control.

Cost of Sales, as a percentage of gross sales, for 1998 and 1997 was 47% and 43%, respectively. The cost of sales variation for 1998 is the result of the Company having more discounted sales through distributors and U.S. Government contracts, and a product mix of items sold with a higher cost than 1997.

For 1998, purchases and costs allocated to cost of goods sold were $758,870 as compared to $492,985 in 1997. The increase is a result of increased purchasing by the Company in 1998 to respond to large U.S. Government orders late in the year, and increased manufacturing salaries and wages, when compared with 1997.

Operating expenses, prior to allocation of expenses to Cost of Sales and Engineering Services, increased to $885,416 in 1998, from 1997 levels of $813,364. Material changes in expenses are comprised of the following components: Advertising expenses decreased to $37,149 in 1998 from 1997 levels of $51,935 due to reduced advertising frequency by the Company in 1998. Supplies and materials expenses decreased to $15,568 in 1998, from $22,079 in 1997 due to decreased research and development projects requiring such material. Professional services increased to $66,210 from 1997 levels of $56,215 due to increased subcontracted engineering services for research and development projects during 1998. Repair and maintenance expenses increased in 1998 to $18,259 as compared to $10,759 in 1997, due to increased equipment repairs, and scheduled facilities maintenance.

Salaries increased to $467,118 in 1998, from 1997 levels of $408,840, due to addition of manufacturing labor and a sales manager for the Company's Mobile Data Computer program. Travel expenses for the Company increased to $50,847 from 1997 levels of $36,804 due to increased marketing trips by the Company. The Company did not incur bad debt expense during 1998 or 1997.

The Company's cash resources at December 31, 1998, including cash and cash equivalent liquid assets, were $1,426,381, reflecting an decrease from cash resources of $1,466,760 for year end 1997. The decrease in cash resources at year end 1998 is the result of increased inventory expenditures by the Company, increased year end accounts receivable levels yet to be converted to cash, and deposits for ESTeem case mold manufacturing, when compared with year-end 1997. Cash flows from operating activities were provided by net income of $162,927, and depreciation of $31,630. Cash flows were offset primarily by increases in accounts receivable of $112,407, inventory of $66,238, deposits paid for ESTeem case molds of $26,250, additions to property plant and equipment of $11,021, cash distributions paid by the Company of $49,537.

LIQUIDITY AND CAPITAL RESOURCES

The Company's revenues and expenses resulted in net income of $52,301 for 1999, reflecting a 68% decrease from the $162,927 net income of 1998.   The reduction in net income is due to reduced sales revenues during 1999, which management believes was primarily due to a reduction in U.S. Government sales.  The Company also reduced the selling price of the ESTeem modem products to both distributors and end users during 1999, which Management feels had minimal impacts on sales revenues and net income during 1999, when compared with the overall reduction in U.S. Government sales.   At December 31, 1999, the Company's working capital was $2,090,155 compared with $2,119,569 at December 31, 1998. The decrease in working capital is primarily attributable to decreases in accounts receivable and inventory when compared with year-end 1998. The Company's operations rely solely on the income generated from sales. The Company's major capital resource requirements are maintaining inventory levels adequate for production and payment of employee salaries. Long lead times for some of the critical components, ranging from 12 to 28 weeks, require the Company to maintain high inventory levels. It is Management's opinion that the Company's working capital as of December 31, 1999 is adequate for expected resource requirements for the next twelve months.

The Company's current asset to current liability ratio at December 31, 1999 was 34.2:1 compared to 25.3:1 at December 31, 1998. The increase in current asset ratio is the result of the Company having no federal income tax liability and reduced trade accounts payable levels at the end of 1999 when compared with year-end 1998.

The Company's cash resources at December 31, 1999, including cash and cash equivalent liquid assets, were $1,624,728, reflecting an increase from cash resources of $1,426,381 for year end 1998. The increase in cash resources at year end is the result of timing differences in sales and collection cycles, when compared with year-end 1998, which included high sales revenues late in the fourth quarter of the year, which remained to be collected at year-end. Cash flows from operating activities were provided by the Company's net income of $52,30. Cash flows were offset primarily by increases, additions to property plant and equipment of $65,508 and cash distributions paid by the Company of $49,537.

The Company's trade accounts receivable, adjusted for allowance for uncollectible accounts, at December 31, 1999, were $154,788, compared to $381,386 at year-end 1998. The decrease is attributable to year-end 1999 being compared with heavy late fourth quarter sales experienced in 1998. Management believes that all of the Company's accounts receivable as of December 31, 1999, are collectible.

The Company believes the level of risk associated with customer receipts on export sales is minimal. Foreign shipments are made only after payment has been received, irrevocable letter of credit terms have been pre-arranged, or on Net 30 terms to foreign offices of domestic companies with which the Company has an existing relationship. Foreign orders are generally filled as soon as they are received, therefore, foreign exchange rate fluctuations do not impact the Company.

Inventory level as of December 31, 1999, was $357,490, reflecting a decrease from December 31, 1998, levels of $385,365. The decrease in inventory is due conservative purchasing by the Company during lower than expected sales months during the year and strong fourth quarter sales revenues decreasing existing inventory items.

Capital expenditures during year 1998 amounted to $65,508, primarily for research/development and manufacturing equipment and computer upgrades. The Company intends on investing in additional capital equipment as it is deemed necessary to support development and/or manufacture of the ESTeem Modem.

As of December 31, 1999, the Company's current liabilities were $62,963, decreased from1998 year-end levels of $87,140. The decrease is due to the lack of federal income taxes payable and decreased levels of trade accounts payable at year-end 1999. All of the Company's accounts payable at year-end were current. The Company recognized Deferred Income liability of $25,017 at year-end 1998 for a public safety communications project, with the liability representing the amount of the contract billed to the customer, but performed during the first quarter of 1999.

The Company's Automated Identification Technology (AIT) subcontract with INTERMEC was a five-year indefinite delivery, indefinite quantity, fixed price contract in place through the end of September 1999. It is Management's opinion that the AIT subcontract contract has not been renewed by INTERMEC due to restructuring of the AIT program and subsequent contracts awarded to INTERMEC.

The Company has a General Services Administration (GSA) contract to sell goods to the U.S. Government. This contract is a fixed price, indefinite quantity and delivery agreement. The current contract runs through February 2004. Projections regarding liquidity, profitability, and material purchases are based on past history of annual purchases. Due to the uncertain nature of Federal Government purchasing, procurement of material and production planning is adjusted quarterly based on demand. It is Management's opinion that the majority of Federal Government purchases in 2000 will be pursuant to the Company's GSA contract.

The Company's operations were not adversely effected by inflation during 1999. No adverse affect is anticipated during 2000.

Board of Directors

Electronic Systems Technology, Inc.

415 N. Quay - Suite 4

Kennewick, WA 99336

We have audited the accompanying balance sheets of ELECTRONIC SYSTEMS TECHNOLOGY, INC. as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ELECTRONIC SYSTEMS TECHNOLOGY, INC. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles.

ROBERT MOE & ASSOCIATES, P.S.

Spokane, Washington

February 7, 2000

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 The accompanying notes are an integral part of this statement

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The accompanying notes are an integral part of this statement.

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The accompanying notes are an integral part of this statement.

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The accompanying notes are an integral part of this statement.

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The accompanying notes are an integral part of this statement.

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The accompanying notes are an integral part of this statement.

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The accompanying notes are an integral part of this statement.

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ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

Business Organization: The Company was incorporated under the laws of the State of Washington on February 10, 1984, primarily to develop, produce, sell and distribute wireless modems that will allow communication between peripherals via radio frequency waves.

Accounting Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition: The Company recognizes revenue from product sales upon shipment to the customer. Revenues from site support are recognized as the Company performs the services in accordance with agreement terms.

Allowance for Uncollectible Accounts: The Company uses their reserve method for recording allowance for uncollectible accounts. The amount included in Allowance for Uncollectible Accounts consists of $1,284 as of December 31, 1999, and $1,284 as of December 31, 1998.

Inventory: Inventories are stated at lower of cost or market with cost determined using the FIFO (first in, first out) method. Inventories consisted of the following:

Property and Equipment: Property and equipment are carried at cost. Deprecation is computed using the straight-line method over the estimated useful lives of the assets. The useful life of property and equipment for purposes of computing depreciation is five to seven years. The useful life for leasehold improvements is thirty-one and one-half years. The Company periodically reviews its long-lived assets for impairment and, upon indication that the carrying value of such assets may not be recoverable, recognizes an impairment loss by a charge against current operations.

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ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Amortization of capitalized software costs charged to expenses for periods presented is as follows:

Cash and Cash Equivalents: Cash and cash equivalents consist of cash, certificates of deposit, time deposits, commercial paper and other money market instruments. The Company invests its excess cash in deposits with major banks, and commercial paper of investment grade companies and, therefore bears minimal risk. These securities have original maturity dates not exceeding three months. Such investments are stated at cost, which approximates fair value, and are considered cash equivalents for purposes of reporting cash flows.

Advertising Costs: Costs incurred for producing and communicating advertising are expensed when incurred.

Other Comprehensive Income: The Company does not have other revenues, expenses, gains, and losses that require disclosure under SFAS No. 130 as other comprehensive income.

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ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

The provision for Federal Income Taxes consisted of:

The components of the net deferred tax (assets) liability at December 31, were as follows:

The differences between the provision for income taxes and income taxes computed using the U.S. Federal Income tax rate were as follows:

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ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

          The Company has no obligation under capital lease arrangements.

6. FOREIGN SALES

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

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NOTES TO FINANCIAL STATEMENTS

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NOTES TO FINANCIAL STATEMENTS

On February 6, 1998 stock options to purchase shares of the Company's common stock were granted to individual employees and directors with no less that three years continuous tenure. The options have an exercise price of $0.41 per share. Options may be exercised any time during the period from February 6, 1998 through February 5, 2001. Following is a summary of transactions:

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ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS

ELECTRONIC SYSTEMS TECHNOLOGY, INC.

NOTES TO FINANCIAL STATEMENTS